Integrys Energy Group Earnings Call Insights: Energy Services and Regulated Natural Gas

Integrys Energy Group (NYSE:TEG) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Energy Services

Ali Agha – SunTrust Robinson Humphrey: A couple of questions. First off, on the Energy Services results, can you give us little more insight you had a strong pickup year-over-year, yet when I look at your full year guidance about what 40% or little over 40% of the full year guidance is already booked in the first quarter. So you give us some sense of how you expect the rest of the year to unfold and also the Chicago contract remind us, is any of that contributed in the first quarter or is that all coming in future quarters?

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Charles A. Schrock – Chairman, President and CEO: Ali, I’m going to have Dan Verbanac give you some of the details around your questions, just keep in mind as we noted previously, we are investing in that company in the terms of O&M for marketing and sales type of service which is going to help us grow in the future. Let me have Dan give you little more detail.

Daniel J. Verbanac – President – Integrys Energy Services, Inc.: Ali, if you noticed in the first quarter of 2013, there is a $3 million tax benefit that will reverse out before the end of the year. So that’s what is helping to attribute it to the first quarter earnings. So when you adjust for that it’s on par with last year, unit margins are – overall margins are up compared to last year and as Charlie mentioned, O&M is up slightly, compared to last year as we continue to invest in that business. So when you make that adjustment, it’s in line with our guidance for 2013. Your second question as it relates to the City of Chicago, we did start serving those customers in February, so we have about 1.5 month worth of service to those customers in the first quarter. So there is some of that business being reflected in first quarter, but the majority of it you’ll see over the remaining three quarters in 2013…

Ali Agha – SunTrust Robinson Humphrey: Then secondly, on the revised guidance for ’13, if I just look at the midpoint of the two ranges, that delta can be explained by the reversal of the reserve, the $0.12 or so. So, one, I wanted to understand are you guys sort of implying it as most companies do the midpoint as kind of the base case and then things could move around? Secondly, factoring in the ALJ recommendation, are you now assuming that’s kind of the floor for what decision you could get out from the Commission, just wanted to get a little more insight on your change in guidance?

Charles A. Schrock – Chairman, President and CEO: Ali, I’m going to have Jim Schott dig into that a little bit for us. But in terms of the range, we do use the range as a reasonable probability of where we expect to be as a whole. The midpoint is not so much where we expect to be per se. It’s really just an arithmetic result, but the overall range is what we focus on. Let me give – hand it over to Jim.

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James F. Schott – VP and CFO: If you’ll recall, in the first quarter guidance, we had a wide range and we basically said the two ends were our recommendation of the rate case and past recommendation of the rate case. The ALJ’s proposed order came out about in the middle of that range. So if you look at it from that perspective, the ALJ gave us an anchor that’s more towards the middle of the range which is why we narrowed the range in the first quarter. I mean in this – yeah in the first quarter. What I characterize the judge’s proposed order as of the minimum, no, I think right now it’s probably in the middle of our range. So we would say it’s reasonable number right now…

Ali Agha – SunTrust Robinson Humphrey: So I mean in other words, just to be clear, the staff position, you’ve sort of taken that out in the range that you have right now?

James F. Schott – VP and CFO: Yeah, we took theirs out and we took ours out because we narrowed the range, right.

Ali Agha – SunTrust Robinson Humphrey: Then my last question. Charlie, going back to your 4% to 6% EPS growth with ’11 as a base through ’15, mathematically even if I take the lower end of that 4%, that implies that ’14 and ’15 are going to be extremely strong growth earnings years for you versus the ’13 number that you have for us right now somewhere in the 9%-10% range mathematically each year. So conceptually, can you tell us what gives you comfort that you can grow earnings so significantly over the next two years?

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Charles A. Schrock – Chairman, President and CEO: Ali, it really starts with the investment that we’re making in our regulated utilities. We have significant investments that we’ve shown you – actually I think at Slide 15 of this deck, but that – if you look at that investment we’re anticipating about a 30% rate base increase over the next couple of years, next few years and assuming appropriate regulatory treatment, that translates into the types of earnings that we’re anticipating to make us – to allow us to hit that 46%.

Ali Agha – SunTrust Robinson Humphrey: I mean and you’re assuming you’re earning your authorized ROEs at the utilities through that period?

Charles A. Schrock – Chairman, President and CEO: Within a fair reasonable amount, right? You know that that fluctuates a bit plus and minus but within a reasonable amount.

Regulated Natural Gas

Charles Fishman – Morningstar: May I ask a question on Slide 17. My question is on that – very first line the $0.20 variance on your guidance, the improvement of $0.20 at the low end of the guidance for the regulator natural gas. Just to make sure I understand this. $0.12 of that $0.20 is basically the decoupling reversal and a $0.01 is whether. So what would the other $0.07 be, if I’m looking at that correctly?

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Charles A. Schrock – Chairman, President and CEO: Charles, we’ve got the slide up in front of us. I’m going to have Jim kind of break that down for you, but you’re partially correct the decoupling is in that regulated natural gas utility segment the judge’s order that we talked about. But let me have Jim kind of step through that with you.

James F. Schott – VP and CFO: If you look at the guidance in the first quarter for the gas segment, we were at a $1 to $1.35. Basically what we did was we added $0.12 to both of those numbers and then narrowed it both ways. So we increased the bottom end, so we raised it by $0.12 plus narrowed the range by $0.08 and on the high end we raised it by $0.12 but again narrowed it down by $0.08. So we’ve narrowed the range on both ends and raised them – raised them both by $0.12 and narrowed the range.

Charles Fishman – Morningstar: So that $0.07 has really just increased confidence after the first quarter’s (down)?

James F. Schott – VP and CFO: After the judge’s proposed order.

Charles Fishman – Morningstar: Then just one other one on. Slide 13, the CapEx does include the SMRP at this point, the projected CapEx?

Charles A. Schrock – Chairman, President and CEO: Larry, go ahead.

Lawrence T. Borgard – President and COO – Utilities Integrys Energy Group: Yeah, it does include the CapEx for SMRP, assuming that we get the proper regulatory outcome which we expect in the third quarter.

A Closer Look: Integrys Energy Group Earnings Cheat Sheet>>

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